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Chase Wang

Essay文章 ·

Everyone Is Doing the Right Thing. But The Industry Is Dying.

Ask anyone in crypto whether they've done anything wrong. The answer, almost universally, is no. Project teams unlocked tokens on schedule per the whitepaper.

Chase Wang

I. A Counterintuitive Question

Ask anyone in crypto whether they’ve done anything wrong. The answer, almost universally, is no.

Project teams say: we unlocked tokens on schedule, exactly as the whitepaper described. VCs say: we took on early risk, and exiting is our legitimate right. Market makers say: we provide liquidity, the market needs us. KOLs say: we shared our views, readers should make their own decisions. Retail investors say: I saw the signals, I followed the momentum.

Every one of them has a point. And yet the industry has become what it is today.

This is not a story about bad actors. Stories about bad actors are easy to tell — find the villain, explain what they did wrong, end of story. This is a harder and more honest story: every participant is making individually rational choices, and together they are producing a system that is slowly bleeding out.

Economics has a term for this: the Fallacy of Composition. What holds true for the individual does not necessarily hold true for the collective. Everyone stands up to see the game, and no one can see anything. Everyone saves more, and total demand collapses. Crypto is this logic playing out in full, inside a nascent industry.

But the fallacy of composition is only the entrance. To truly understand how this industry arrived where it is, we need to go two levels deeper: how the damage actually happens, and why the system cannot repair itself.

II. Nobody’s Wrong

Let’s reconstruct the logic of each participant clearly. Only by understanding it can we understand why the problem cannot be solved by finding someone to blame.

Project teams and VCs: a rational financing structure

Launching tokens with low circulating supply and high fully diluted valuation is not fraud. It is a financing strategy that is rational for both project teams and early investors. Teams create scarcity by locking supply, sustaining early price levels. VCs enter in private rounds at prices far below the public market, then exit after unlock.

Binance Research’s 2024 report put a number on the scale of this logic: approximately $155 billion worth of tokens will unlock between 2024 and 2030. The market cap to fully diluted valuation ratio for tokens launched in 2024 was just 12.3% — meaning what’s currently circulating is only the tip of the iceberg, with the vast majority of supply still locked and waiting. Arbitrum offers a concrete cross-section: in March 2024, approximately 1.1 billion ARB tokens unlocked, instantly increasing circulating supply by 76%. The token price subsequently fell more than 50% from its pre-announcement high.

Each project makes this decision independently, and it is rational. When 378 projects make the same decision simultaneously, the result is a market facing permanent structural selling pressure, with the liquidity pool contracting by design.

KOLs: arbitraging information asymmetry

The KOL business model is essentially the monetization of information asymmetry. They receive token allocations at prices far below public market rates, promote them to their audiences, and exit as retail buyers come in. This is rational for the KOL, and rational for the project team — they need the traffic to sustain the price. KOLs themselves understand the structure: “You’re obviously making your community exit liquidity,” said one influencer who declined such arrangements. “These deals are not properly disclosed in most cases.”

A Harvard Business School research team analyzed roughly 36,000 tweets and found that tokens recommended by KOLs delivered an average first-day return of 1.83% — that short-term positive signal is real, and it is precisely the signal retail investors act on. But three months later, those same tokens showed average losses of 19%. KOLs who described themselves as “experts” or “analysts” in their profiles produced losses 4.5 percentage points worse than non-experts on average. The FTC estimates that investors lost nearly $1 billion in social media-linked crypto scams between early 2021 and mid-2022.

Nobody lied. The short-term signal genuinely existed. The information structure was simply designed so that profits and losses accrue to different people.

Retail investors: right in the short term, wrong position in the structure

Retail participants are repeatedly described as greedy or foolish. That is unfair. In an environment where KOLs are endorsing a project and prices are rising, following the signal is Bayesian-rational. The problem is not a failure of judgment — it is the structural role they occupy: the ultimate provider of liquidity.

That phrase deserves unpacking. “Ultimate liquidity provider” means the person who ends up on the other side when everyone else needs to convert their tokens into real money. When project teams need to monetize, someone has to buy. When KOLs exit their allocations, someone has to buy. When market makers rebalance, someone has to be on the other side. That someone, structurally, is almost always retail — not because they are foolish, but because they are last in. They arrive after the information has been filtered and the price has already been pushed up.

None of this was designed by anyone. It is the stratification that forms naturally when information asymmetry meets an unregulated market.

III. The Tragedy of the Commons: What Is Being Consumed

Look at the behavior of every participant together, and a common structure becomes visible: everyone is drawing from the same shared resource.

That resource is market trust and liquidity.

Trust and liquidity are the common property of the entire crypto ecosystem. High-FDV issuances consume liquidity. KOL pump-and-exit cycles consume trust. Market makers’ informational edge erodes retail participation. Exchange misappropriation depletes the industry’s foundational credibility. But no participant has any incentive to replenish this resource — replenishing trust and liquidity is slow work, consuming it is fast money.

Economics has a term for this: the Tragedy of the Commons. Shepherds share a pasture; each additional sheep is individually profitable, but when everyone adds more, the pasture is destroyed. No one wants the pasture destroyed. Everyone rationally contributes to that outcome.

FTX is the clearest case study in this mechanism, but understanding it requires a different frame. The collapse of FTX was not only a fraud story. It was a case study in what happens when a system with no external constraints allows its internal logic to run to its conclusion. Before its collapse, FTX was the world’s third-largest exchange by volume, with over a million users and a $32 billion valuation. The collapse was triggered by a wave of customer withdrawals that exposed an $8 billion hole in the accounts — funds that had been deployed into investments in over 400 companies, $300 million in Bahamian real estate, and more than $100 million in political donations. The court-appointed administrator who took over, John J. Ray III — the same man who oversaw the Enron liquidation — stated that in his entire career he had never seen such a complete failure of corporate controls.

After FTX collapsed, the trust foundation underlying the simple act of “holding assets on an exchange” was destroyed industry-wide. That loss belongs to everyone, not to any single project. This is the essence of the tragedy of the commons: the extreme behavior of an individual is paid for by the shared resource.

Terra/Luna displayed the tragedy of the commons in its decentralized protocol form. A joint study by MIT and the London School of Economics found that blockchain transparency — which allows investors to monitor each other’s actions in real time — was designed as a protection mechanism but functioned as an accelerant of panic: seeing others run made running rational. More sophisticated and better-capitalized investors exited first and lost the least. Within a week, Terra/Luna’s collapse directly erased approximately $45 billion in market capitalization and transmitted more than $400 billion in losses across the broader crypto market. Nobody wanted this outcome. Everyone acted rationally.

IV. No Lender of Last Resort: Why the System Cannot Repair Itself

Having understood the damage mechanism, we arrive at the more fundamental question: why can’t the system fix itself?

Start with a simple problem. When a bank run occurs, depositors withdraw in panic, the bank’s cash reserves cannot cover all redemptions, and without any external intervention, the bank fails. This logic applies to any financial institution — including those whose underlying assets are perfectly sound but which face a temporary liquidity shortage.

Traditional finance has a solution: the Lender of Last Resort (LOLR). When a liquidity crisis hits, the central bank can provide emergency loans to institutions facing runs, interrupting the transmission of panic. But the core function of the LOLR is not only “ex-post rescue.” More importantly, its existence changes everyone’s expectations in advance. When the market knows someone can backstop a crisis, rational panic cannot spread without limit, runs are harder to ignite, and institutions dare to make long-term commitments. This “expectation” is an invisible stabilizer.

The 2008 financial crisis was the clearest stress test of this mechanism. The root cause was the US housing market bubble, but the real systemic risk came from leverage. The five major investment banks were running at routine leverage ratios of 30 times; Lehman Brothers itself was at 40:1 — meaning for every $40 in assets there was just $1 in capital to absorb losses. A 2.5% decline in asset values would wipe out equity entirely.

The contagion was real and violent: the day after Lehman collapsed, money market funds “broke the buck,” and investors redeemed $144 billion from money market funds in a single day — effectively a bank run on the entire short-term credit market. But the lender of last resort intervened immediately. Within 24 hours of Lehman’s collapse, the Federal Reserve injected $85 billion into AIG. Within a week, TARP was activated, with Congress authorizing $475 billion to stabilize the financial system — $250 billion to recapitalize banks, $70 billion for AIG. The Fed, ECB, Bank of England, and People’s Bank of China coordinated interest rate cuts. By 2014, the Fed’s balance sheet had expanded from under $1 trillion to over $4 trillion, covering the entire systemic liquidity gap. From Lehman’s collapse to full intervention: 72 hours. The ultimate net cost of TARP: approximately $31 billion — mobilizing $475 billion and recovering all but 6.5%.

The 2022 crypto crisis was a controlled experiment run without this mechanism. From Terra’s collapse in May to FTX’s bankruptcy in November, the entire contagion chain played out in seven months. Three Arrows Capital had borrowed $2.4 billion from Genesis, $1 billion from BlockFi, and $665 million from Voyager; when it defaulted, all three were crippled. Celsius froze the accounts of 1.7 million users, with a $1.2 billion balance sheet deficit. FTX went from the CoinDesk report to bankruptcy filing in nine days, with users attempting to withdraw $6 billion, none of it accessible. Total crypto market capitalization fell from a peak of $2.9 trillion to $798 billion — a $2.1 trillion evaporation. The attempt at private rescue — FTX briefly playing white knight to acquire Voyager — became another link in the chain. The entire sequence concluded with no sovereign intervention whatsoever. All losses were borne by users in full, with no recovery mechanism.

The fundamental difference between these two crises comes down to one variable: whether anyone, within 72 hours, could supply liquidity without limit and make the market believe they would.

The dollar dependency structure

There is a layer to this that is often overlooked. Crypto’s liquidity is entirely dependent on the dollar system.

The stablecoin market now stands at nearly $300 billion — up from under $42 billion in 2020 — with USDT and USDC together comprising over two-thirds. Stablecoins account for approximately 40% of total crypto trading volume. US-listed Bitcoin and Ethereum spot ETFs hold approximately $132 billion in assets, attracting roughly $49 billion in net inflows in 2024 alone. Stablecoin issuers have become the seventh-largest buyers of US Treasuries, with Tether’s holdings reaching sovereign-nation scale.

All price discovery, position settlement, and liquidity provision across the crypto ecosystem is denominated in dollars. Crypto has no unit of account of its own. It borrows the dollar’s.

The March 2023 SVB crisis illustrated the direction of this dependency precisely. When Circle confirmed that $3.3 billion in USDC reserves were held at Silicon Valley Bank, USDC instantly depegged to $0.87; DAI fell in tandem to $0.85. The dollar system sneezed, and crypto’s liquidity foundation caught a cold. The reverse did not hold: when crypto markets erased $2 trillion in value in 2022, not a single systemically important bank failed as a result, the Federal Reserve did not adjust monetary policy, and the real economy barely registered the transmission.

Crypto is deeply dependent on a system that has lender of last resort protection. It is excluded from that protection entirely.

V. Argentina’s Mirror

In the history of global economics, a certain class of economies has long faced a structurally analogous predicament: they use a currency they cannot create, find no internal source of liquidity in a crisis, and are forced to seek external rescue or absorb the full impact of every storm.

The most thoroughly studied of these cases is Argentina.

Argentina has a central bank that exists on paper. In practice, it cannot function as a genuine lender of last resort. The reason is direct: in a crisis, what the market wants is dollars, not pesos. Injecting pesos cannot solve a dollar liquidity crisis; it only triggers inflation and a currency crisis — a cycle Argentina has experienced repeatedly. In the 2001 crisis, the banking system froze deposits in what became known as the corralito, the economy contracted by roughly 11% in 2002 alone, and unemployment surpassed 20%. The sovereign bond default — approximately $82 billion in principal, with total restructuring obligations exceeding $100 billion — was the largest in history at that point.

So in every Argentine financial crisis, the real lender of last resort is the IMF. External rescue, with sovereign policy space as the price: fiscal deficit reduction, interest rate increases, capital account liberalization. Argentina’s borrowing history with the IMF spans virtually its entire independent financial existence. In 2022, the Argentine government reached a $44 billion debt restructuring agreement with the IMF — one of the largest single-country arrangements in the fund’s history.

This structure describes a critical fragility: when you use a currency you cannot create, there is no ultimate domestic source of liquidity. In a crisis, you either seek external rescue or wait for the market to clear on its own — and the cost of market clearing is always borne in full by whoever remains.

Ecuador and El Salvador demonstrate that this predicament is not entirely without a solution. After full dollarization, both countries legislated a system requiring banks to jointly fund emergency liquidity facilities, disbursed in tranches with progressively stricter restructuring plan requirements for later tranches. The mechanism worked because the incentive structure was sound: the contributors were also potential beneficiaries, so a fund collapse would hurt them too, creating genuine motivation to monitor its use and bank behavior. Through the 2008 global financial crisis, these funds were never drawn upon — system discipline was sufficient to weather the external shock.

This mechanism works because of one indispensable precondition: participants have long-term residency incentives.

Banks operating in Ecuador and El Salvador hold regulatory licenses, serve long-term customers, and maintain brand reputations built over years. They have no “cash out and exit” option — only sustained operation or closure. Because of this, they are willing to fund system stability, because system collapse is their own problem to bear.

Apply this precondition to crypto, and the structural mismatch becomes clear.

Project teams’ optimal strategy is to monetize during the token unlock window, not to lock capital into an emergency fund. VC LP evaluation cycles run three to five years, not thirty; their performance metric is IRR, not industry health. KOL attention can shift to the next hot narrative at any time. Market maker contracts are measured in quarters. Retail participants, in a market with no deposit insurance, are rationally always ready to exit.

No class of participant has an incentive structure compatible with “contributing to a shared safety net and maintaining it over the long term.” Not because they are morally inferior, but because the participant structure of crypto simply does not possess the prerequisite conditions that made the Ecuador and El Salvador model work.

The deeper paradox is that this incentive structure was itself shaped by the absence of a lender of last resort. Because all participants know there is no backstop, the rational response is to compress time horizons and extract value faster. So no one contributes to a shared safety net. So the system can never build a substitute mechanism. So the “no backstop” expectation is continuously confirmed. So everyone continues to act short-term.

This is the fallacy of composition in its terminal form: no one did anything wrong, but everyone rationally refused to build a shared safety net, and together they produced a system structurally incapable of repairing itself.

VI. The Question of Survival

There is one final layer — more fundamental than the lender of last resort question.

Regardless of the depth of any given crisis, Argentina always has a base-level source of dollars: soybeans, corn, oil, beef. Agricultural and natural resource exports generate tens of billions in hard currency annually, providing the material foundation for rebuilding liquidity.

Crypto as an industry generates its “real dollar value” largely through the sustained inflow of external capital rather than internal circulation. This places it in a more precarious position than any sovereign economy: it competes every day, against traditional finance, technology, and the real economy, for dollars from the same pool.

In that competition, the industry’s credit foundation, its stock of trust, and the depth of its liquidity determine how much incremental capital it can attract. The dynamics of the fallacy of composition — trust being systematically consumed, liquidity being structurally extracted — are giving it a structural disadvantage in that competition. Every collapse is a net outflow. Every trust deficit makes the next fundraising cycle harder. No lender of last resort means no one stabilizes dollar inflows during a crisis; every clearing event requires the market to find its own floor, and the cost is borne in full by whoever stayed.

The US Strategic Bitcoin Reserve may be a directional signal. In March 2025, President Trump signed an executive order designating approximately 207,000 bitcoin — roughly $17 billion at the time — as a permanent national reserve asset, explicitly labeled “digital gold.” This structurally creates a new alignment of interests: a significant Bitcoin decline now affects the US government’s balance sheet, generating some political motivation for stability. But this is not a lender of last resort. It is a large shareholder announcing they won’t sell their stock — not a commitment to inject capital in a crisis. In a February 2025 survey of economists by the University of Chicago, not a single respondent agreed that a strategic Bitcoin reserve would reduce the risk profile of central bank reserve portfolios.

The true reverse transmission channel — where crypto becomes large enough that the Federal Reserve cannot ignore its systemic risk — may eventually arrive. But until that threshold is crossed, crypto remains suspended between two impossibilities: unable to fully integrate into the traditional system that carries lender of last resort protection, and not yet generating enough internal liquidity to sustain an independent capital cycle.

If the crypto industry cannot produce enough real value to win its share of dollar resources, and cannot form a healthy internal capital loop, the space available to it will gradually contract — not because anyone is suppressing it, but because its own participant structure prevents it from holding onto the thing it needs to survive.

Between these two impossibilities, the logic of the fallacy of composition runs every day.

Everyone is doing the right thing.

References

Token Economics & Unlock Data

KOL Economics & Retail Losses

FTX Collapse

Terra/Luna Collapse

2008 Financial Crisis

2022 Crypto Contagion

Stablecoins & Dollar Dependency

Bitcoin & Ethereum ETFs

Dollarization & LOLR Alternatives